A Balance Sheet is a basic financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. This financial tool is used by investors, executives, analysts, banks and other entities to understand the financial health of a business as it will show whether the company has a positive net worth, enough cash and short-term assets to pay its liabilities, and whether the company is highly leveraged in its current financial state.
Sections of a Balance Sheet
Current Assets are any assets that are liquid or expected to be liquid within the next year of operations. Included in Current Assets, but are not limited to, are; Cash, Accounts Receivable, Intercompany, Undeposited Funds, & Inventory.
Fixed Assets or Intangible Assets are the next section of the Balance Sheet and include any type of significant purchase (usually over $2,500) that helps the company create revenue. Fixed Assets can include purchases such as machinery that makes the items that are sold. It may include a building or leasehold improvements. Intangible Assets are purchases that have been made that are not physical in nature. A good example of this is tech expenses used to build an app. All monies spent to create the app including expenses like hosting, are able to be capitalized (listed as a Fixed or Intangible Asset) to the Balance Sheet. The sister accounts to these accounts on the Balance Sheet are the Accumulated Depreciation/Amortization which measure how much the asset value has decreased over time.
Other Assets such as Security Deposits, Deferred Tax Assets, Bond Issuance Costs, etc., are assets that are generally expected to be realized in more than a year from the current date.
Total Assets are sum of all categories above and give the user a view of the total amount of dollars that could be converted to pay off obligations.
The Liability section of the Balance Sheet is laid out the same as the Asset section. It looks at what liabilities are needed to be met now, within the next year, and after a year; Accounts Payable, Current Liabilities, and Other Liabilities are the main parts of the Liability section.
The Equity section of the Balance Sheet consists of the following possible components; owner's contributions/distributions, outstanding shares, additional paid-in capital, retained earnings, current year earnings, treasury stock, and other Equity accounts. Mathematically, the Equity section is the result of Total Assets minus Total Liabilities.
Furthermore, a Balance Sheet can be represented one of two ways; the Accrual or Cash Method. This determination is mainly used as your appointed method for tax purposes. If you choose Accrual, your business will report taxes using the Accrual Method yearly unless you "Change Accounting Methods" with the Internal Revenue Service. Basically, with Accrual Accounting, the Balance Sheet shows Accounts Receivable and Accounts Payable and is taxed according to booked revenue and expenses. With the Cash Method, only cash transactions that have already happened are used to calculate the accounts on the Balance Sheet.
Finally, Financial Ratios such as the Quick Ratio ((Current Assets-Inventory)/Current Liabilities) is used to measure liquidity. It calculates a company's ability to pay current liabilities with assets that can be converted to cash quickly. What is the Quick Ratio from the above Balance Sheet? If you calculated it as 0.6, you nailed it. The equation is (Current Assets - Inventory)/(Current Liabilities).
We hope this gave you a good glimpse of the Balance Sheet basics. If you ever have any questions about Financial Statements or any other Accounting questions, please feel free to contact us.
Blue Collar CFO